MarketWatch: Large Government Bailout Stakes Should Go Into Trust

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MarketWatch: Large Government Bailout Stakes Should Go Into Trust

Republican lawmakers gathered in Washington on Tuesday to promote their proposals to expedite the bankruptcy process, create a trust for large problem institutions and express their belief that the White House and Democratic regulatory-reform plans will simply enshrine a bailout culture by continuing the policies of the past.

"We need to end the bailouts once and for all," said Rep. Spencer Bachus, R-Ala., ranking member of the House Financial Services Committee.

...Democrats seek to empower the Federal Deposit Insurance Corp. with the authority to collect fees from large institutions to pay off creditors and counterparties of an insolvent large institution, an approach that would seek to quickly limit the collateral damage that institution would have on the markets. Lawmakers are debating whether their legislation would have that collection take place up front, periodically, as FDIC Chairwoman Sheila Bair has proposed, or after a collapse to cover a taxpayer-funded infusion, as the White House is seeking.

The collapse of Lehman Brothers a year ago sparked a firestorm in the global markets and threatened a financial cataclysm. Even today the question remains, would saving Lehman have made a difference?

The GOP proposal would not grant the FDIC with that unwinding authority. Instead, it would seek to streamline the bankruptcy process that supporters say would be better tailored to resolving nonbank financial institutions in an expedited manner, so that any collapse does not hurt the markets.

The Republican package seeks to legislate a new chapter in the bankruptcy code that would improve coordination between regulators and financial institutions during the bankruptcy process so that regulators can provide technical assistance and expertise about the institution.

A key proponent of the measure, which is also advocated by the American Enterprise Institute, would authorize bankruptcy judges to stay claims by creditors and counterparties during the process, to limit a counterparty "run on the bank."

"We know that the bailout of failed firms is not the direction we want to go," said Rep. Shelley Moore Capito, R-W.V.

She pointed out that with the Democratic approach it was very unclear whether institutions would cover the costs of resolving a large institution, or whether those fees would be covered by taxpayer dollars, as she suspects.

Capito pointed out that Congress passed legislation that would allow the FDIC to borrow as much as $500 billion from Treasury through 2010 to cover losses to its existing deposit-insurance fund, which is used to cover losses to depositors when their retail bank collapses. She said that the taxpayer-backed fund could be used to cover payments to a failing systemic institution's counterparties.

"That's the implicit federal government and taxpayer stepping up to the plate to provide a backstop to this," Capito added.

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